The Austro-Hungarian Compromise of 1867, commonly known as Ausgleich, established the Dual Monarchy of Austria-Hungary, formerly the Habsburg Empire. Signed by Emperor Franz Joseph of Austria and a Hungarian delegation led by Ferenc Deák, the Compromise established the framework of the new government in which the Cisleithanian (Austrian) and Transleithanian (Hungarian) regions of the state were governed by separate Parliaments and Prime Ministers. Unity was maintained through a common ruler, military, and several ministries. The Compromise was formally voted on by the restored Hungarian Diet on March 30 1867.
Prior to the Compromise, the Habsburg Empire had addressed internal pressures through less drastic reform. Rising nationalism throughout the 19th century threatened the stability of the state as the ruling Austrian elite faced pressures from Magyars, Romanians, Czechs and Croats among others. The state's loss in the Austro-Prussian War in 1866 was the final factor in the state’s decision to restructure. With the defeat, Austria needed to redefine itself in order to maintain unity in the face of nationalism. The suggestion for a dual monarchy was made by the Habsburgs but Hungarian statesman Ferenc Deák is considered the intellectual force behind the Compromise.
Under the Compromise of 1867, Austria-Hungary has two capital cities, Vienna and Budapest. The two regions have separated Prime Ministers and Parliaments that create and maintain different laws. Austria-Hungary remains unified through several ministries and in the form of a single ruler, the Emperor-King. The army and navy are managed by a common Ministry of Foreign Affairs and trade regulation are also unified under the Ministry of Finance. There is no common citizenship, but matters such as weights, measures, coinage, and postal service were made uniform. Terms of the Compromise were renegotiated every ten years.
After 1867, relations between the two halves of the empire featured repeated disputes over shared external tariff arrangements and over the financial contribution of each government to the common treasury. These matters were renegotiated every ten years, but they often led to political turmoil and constitutional crisis. The disputes between the halves of the empire culminated in the mid-1900s in a prolonged constitutional crisis, triggered by disagreements over the language of command in Hungarian army units and deepened by the advent to power in Budapest (April 1906) of a Hungarian nationalist coalition. Provisional renewals of the common arrangements occurred in October 1907 and in November 1917 on the basis of the status quo.
Despite the victory in the Weltkrieg, the war revealed the Empire’s significant weaknesses and its dependence upon Germany. Despite Emperor Karl's continued efforts to establish a multinational and revived empire, nationalistic tension rose, most notably, between Czechs and ethnic Germans, and numerous other minorities, who had historical nationalist tendencies. The Ausgleich negotitions in 1927 soon degenerated in quarrels and disputes between the ethnic minorities of the empire, prompting a constitutional crisis. Faced with a potential civil war within the Empire, Karl had to face the humiliation of having to call in German mediation to resolve the deadlock. The Germans denied the Hungarian requests for greater power in the Dual Monarchy, but forced Austria to concede autonomy statutes to Bohemia and Galicia-Lodomiera and transfer the control over Ukraine (obtained at the end of the Weltkrieg) to Germany itself. The newly established Kingdom of Illyria, formed from the south slavic territories of the Empire (Croatia, Bosnia, Montenegro) was recognised as a secondary constituent within the Cisleithanian half of the country.